Philippine banks are becoming the second largest shareholder of South Korea's troubled shipbuilder Hanjin Heavy Industries & Construction Co. This is part of a debt restructuring plan to rehabilitate HHIC-Phil Inc., a subsidiary of Hanjin Heavy that operates a shipyard in Subic Bay.
Hanjin Heavy creditors held a meeting at the Korea Development Bank (KDB) headquarters building on Feb. 18 to share the proposal agreed by Hanjin Heavy and its creditor banks in the Philippines, according to investment banking (IB) industry sources on Feb. 19.
Under the agreement, Philippine banks will swap 166.6 billion won (US$147.63 million) of their 460 billion won (US$407.62million) loans to HHIC-Phil for a 20 percent equity stake in Hanjin Heavy. The banks’ remaining loans will be converted into an equity stake in HHIC-Phil. The book value of Hanjin Heavy’s 99.99 percent stake in the Subic shipyard stood at 631.6 billion won (US$559.68 million) as of the third quarter of last year.
Domestic creditor banks of Hanjin Heavy will also convert 70 percent of their loans into equity. The KDB gave notice to the Korean creditors that they must complete the conversion of their loans into equity by Feb. 28, except for 200 billion won (US$177.23 million), or 30 percent of their loans. This is because the company will be delisted from the stock market if the creditor banks fail to complete the conversion on time.
Hanjin Heavy will carry out capital reduction without refund for the whole 31.67 percent stake owned by Cho Nam-ho, chairman of Hanjin Heavy Industries & Construction Holdings Co., and affiliated parties. The company is also considering capital reduction without refund for most of the remaining old shares, including those held by minority shareholders. Generally, all the old shares of a company are subject to capital reduction without refund when its capital is completely impaired.
The KDB will participate in the proposed debt-equity swap. The bank has included its accounts receivables in the debt-equity swap. The KDB’s loans to Hanjin Heavy are mostly secured, while those of other creditors are unsecured. Other creditors complained that they would shoulder more burden than state-run bank. The KDB owns about 120 billion won (US$106.34 million) worth of account receivables for Hanjin Heavy.
The shipbuilder is planning to sell its land parcels in Yuldo, Incheon, and Dongseoul bus terminal by the end of the year. However, it will not sell its Youngdo shipyard in Busan. An official from the IB industry said, “Through the debt-equity swap, Hanjin Heavy will fall into a state of partial capital impairment. It is seeking to escape from capital impairment by selling its assets.”
Previously, Hanjin Heavy received 250 billion won (US$221.53 million) worth of new funds from creditors after signing a voluntary debt restructuring agreement with them in 2016. However, the company recorded 3.45 trillion won (US$3.06 billion) in total liabilities at the end of last year, which was far higher than its total assets of 2.71 trillion won (US$2.40 billion). Stock trading of Hanjin Heavy was suspended on Feb. 13 because the company’s capital has been completely eroded after reflecting losses from its subsidiary in the Philippines.
Meanwhile, Cho is about to lose control of the company. Creditors are planning to force Cho to step down and appoint a new professional manager to run the company.